The Rational Investor #025: Buffett on Using Market Prices to Our Advantage
Happy Saturday to you,
Welcome to the 25th edition of The Rational Investor Newsletter.
Today’s quote comes from Jeremy Miller's book Warren Buffet’s Ground Rules. While most are familiar with Buffett’s Berkshire letters, this book is a collection of his letters from his days running an investing partnership, pre-Berkshire. The quote below offers a review of Benjamin Graham’s Mr. Market concept and how we should view the market in light of it.
Onto the main event…[emphasis is mine]
Here’s Warren Buffett on Using Market Prices to Our Advantage:
“Graham’s most valuable explanation of exactly how short-term market inefficiency works was crystallized in his concept of ‘Mr. Market.’ The idea is that a securities market can be thought of like a moody, manic-depressive fellow who stands ready to buy or sell you a half stake in his business every day. His behavior can be wild, and irrational, and is difficult to predict.
Sometimes he’s euphoric and thinks highly of his prospects. Here he’ll offer to sell you his stake only at the highest of prices.
At other times he’s depressed and doesn’t think much of himself or his business. Here he offers to sell you the same stake in the same business at a much lower, bargain price.
Oftentimes he’s neutral.
While you can never be sure what mood you will find him in, you can be sure that regardless of whether you trade with him today, Mr. Market will be back again with a new set of prices tomorrow.
Viewing the market through the lens of Graham’s allegory reveals why the market price on any given day should not inform our view of a security’s underlying intrinsic value. We must arrive at that figure independently and then only act when Mr. Market’s mood is in our favor. That is what Buffett is driving home in his letters when he teaches, ‘a market quote’s availability should never be turned into a liability whereby its periodic aberrations in turn formulate your judgments.’ If you rely on the market’s price to value a business, you’re apt to miss opportunities to buy at times when he’s depressed and sell when he’s manic. You can’t let the market do your thinking for you.”
I think you’ll agree that one reason so many investors fail is that they allow the “market to do their thinking for them.” They REact to panics by selling (simply because other people are selling) and to manias by buying (simply because other people are buying).
This is exactly what Buffett warns us about. A market quote’s availability should never be turned into a liability. On the contrary, it’s clear that Buffett views market quotes solely as an asset he can use to make educated investing decisions that will provide maximum benefit for him and his shareholders. We should do likewise.
Thanks for reading. I’ll be back again next week with more timeless wisdom from great investors.
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